Dairy prices have fallen below "sustainable" levels, but producers
will have to wait until late this year for a recovery as Chinese importers,
which has "bought far more than they needed", work their way through their stockpiles.

Rabobank said that the plunge in dairy prices, which have
fallen by about one-quarter at GlobalDairyTrade since early February, was "more
severe than anticipated" and has taken them below levels it "considers to be sustainable
in the medium term".

In the European Union, for instance, the top cows' milk
producer, the dent to margins from lower milk payouts will slow year-on-year production
growth to "just" 1% in the second half of 2014, down from 6.4% seen in the
first four months of the year.

In New Zealand, the top milk exporting country, growth in
the newly-started 2014-15 marketing year will slow to 2-3% "at best" from an
estimated 10.5% last season.

Overall output growth in major exporting countries "will
slow considerably", from 4.7% in the first half of the year to 1.8% in the second
half.

'Bought far more than
they needed'

The slowdown has posed the question of "when, not if, prices
move upwards again from here," the bank said.

However, the answer appears to be that values may,
potentially, not rise until next year, Rabobank said, cutting by up to $800 a
tonne its forecasts for milk powder prices.

The bank forecast "little improvement in prices until late
2014-early 2015", reflecting the need for buyers to digest the recent stronger-than-expected
milk supplies, with the extent of Chinese stockpiles a particular pressure on
values.

"China bought more than we anticipated in the first five
months of the year. It now appears they also bought far more than they needed."

A 60% rise in imports in the January-to-May period, coupled
with a slowdown in demand growth, fostered by price rises, and a "stabilisation"
in domestic milk production "have left major Chinese buyers and traders with a
significant inventory accumulation".

China milk production
debate

Rabobank forecast that Chinese dairy production, hurt last
year by poor weather and an outbreak of foot-and-mouth disease, was running at
year-ago levels, and would show an increase in the second half of the year,
although the rate of growth "will remain very modest".

However, some other observers are far more sanguine over
milk production growth, with Agrimoney.com having heard some talk of rates
running 6% higher than a year ago.

US Department of Agriculture staff in Beijing, in a report
overnight, downgraded their estimate for Chinese cows' milk production in 2014
to 36.0m tonnes, but this still represents an increase of 5.0% year on year.

Separately, industry data overnight showed Australian milk
production running 8.2% higher last month than in May 2013.

That reduced to 0.2% the deficit for the full 2013-14 season,
with one month to go.